On Yuan: What They Said and When

Now that Beijing has announced plans to make the yuan more flexible, investors should anticipate a wave of “I told you so” back-slapping from the financial sector.

For many yuan-watchers, the late May crisis in Greece took a long-awaited yuan adjustment off the table. But more recently, a surge in China’s trade surplus for May made a change more likely, particularly ahead of the late June G-20 Summit in Toronto.

Here’s a non-exhaustive, cheat sheet for what some analysts actually said in recent weeks about prospects for China to adjust its exchange rate, beginning with the more recent comments.

“Expectations for the gathering into Toronto this coming weekend (26th – 27th) are therefore low. Nonetheless, we continue to think there is a good chance that China will move on the renminbi at around this time.” (June 21, 2010)Julian Jessop, Capital Economics

“Investors should assume that tightening in China remains in place throughout the third quarter unless global markets blow up again.” (June 18, 2010)Christopher Wood, CLSA

“The turmoil in Europe has pushed the renminbi out of the spotlight. However, May’s large trade surplus may focus some attention back on the currency, even though we believe the surplus is not sustainable. Note that U.S. Treasury Secretary Geithner called China’s FX regime “an impediment to global rebalancing” on 10 June. While the European debt crisis persists we recognize the arguments for China to delay the move from a macro stability point of view. However, we believe the renminbi will eventually move. The 12-month NDF is pricing in a 1.5% appreciation as of 11 June. Our FX team’s forecast calls for 1.9%……. Macro stability is an extremely important objective for China, and we recently pushed out the timing of our RMB call to 4Q10, as the crisis in Europe intensified. Thus, we recognize the arguments to delay the move. However, we think the renminbi WILL eventually move.” (June 16, 2010)TJ Bond, Bank of America Merrill Lynch

“First, real exchange rate appreciation is about an increase of the equilibrium exchange rate as the structure of the economy changes, rather than a correction of undervaluation. This implies that the pace of appreciation is likely to be gradual rather than sudden. Second, the nominal CNY exchange rate needs to be more flexible versus the USD to avoid large swings in the effective exchange rate, which may inhibit real exchange rate adjustment at times.” (June 14, 2010)Wensheng Peng, Barclays

“More exchange rate flexibility would make monetary policy more independent. By introducing useful two way risk on the foreign exchange market, such flexibility gives monetary policy more room to be in line with domestic needs and to raise interest rates even when interest rates in high income countries remain low. This feature of exchange rate flexibility will become increasingly important if China’s cyclical conditions will diverge more often from those in the US, since then U.S. monetary conditions (the interest rate) are not appropriate for China. With regard to the level of the exchange rate, a stronger currency helps reducing inflation pressures by lowering the price of imports and toning down demand. It also helps rebalancing China’s pattern of growth towards more services and consumption and less industry and investment.” (June 18, 2010)China Economics Team, World Bank

“While we expect a period of monetary policy pause in terms of RRR or interest rate hikes in the coming months, we maintain our long-standing call for a renminbi depeg from, and revaluation against, the USD during the summer, especially in view of the strong trade data.” (June 11, 2010)Wang Qing, Morgan Stanley

“The fall in the EUR has thus underscored to China the dangers of revaluing against the USD even as other currencies whip about. So stability will again be the guiding rule of FX policy. However, the chances of appreciation are not dashed entirely. First, China has disliked rewarding speculators with CNY gains. But with CNY non-deliverable forwards now pricing in only marginal appreciation against the USD, many speculative long CNY positions have been cut. There are also far fewer places to invest speculative capital inflow with the property market now softening. Second, foreign criticism of China’s FX policy will not disappear. U.S. elections are due in November, a slow growing Europe may turn more protectionist, and emerging market capitals, from New Delhi to Sao Paulo, are starting to express their displeasure of a cheap CNY. Even a token move by China would help appease such critics. The forecast now looks for marginal appreciation, at a lower annualized 3% rate, from end-Q3, as opposed to end-Q2. If so, the move is likely to be accompanied by a token widening in the trading band, from +/-0.5% to +/-1.0%, and emphasis that the CNY is “loosely” tracking a basket of currencies, as opposed to a strict SGD-style basket. There is a risk the new forecast is overtaken by further deterioration in Europe and EUR/USD. But the forecast underscores that the chance of a change in FX policy has not disappeared entirely, even as the possibility of a one-off revaluation is now ruled out entirely, while the risks of CNY “depreciation” remain small. (May 26. 2010)

“The forecast for a resumption of modest CNY appreciation in 3Q is thus intact. Today’s trade data only adds to the urgency, while the recent squeeze in long CNY positions provides an opportunity to China to move without rewarding speculators. I am targeting USD/CNY to reach 6.750 at end-10 and 6.550 at end-11.” (June 10, 2010)Ben Simpfendorfer, Royal Bank of Scotland

“If the government wants to think outside the box, the timing for a shift from a dollar peg to a basket regime could not be better. A plunging euro means the yuan could appreciate against a basket of currencies whilst holding steady against the dollar.

But for the resumption of appreciation against the dollar, an uncertain outlook for external demand, turmoil in financial markets, and instability in the value of major currencies, add up to an inauspicious environment. The chances of an imminent resumption of appreciation against the USD are fading, and May’s bumper surplus may have arrived too late to resuscitate them.” (June 10, 2010)Tom Orlik, Stone & McCarthy Research Associates

“Pressures for a revaluation or renewed appreciation of RMB have increased substantially in recent months, and will likely intensify further. The strength in economic recovery, including in exports, provides support for an early resumption of RMB appreciation. However, the sovereign debt crisis in Europe has increased uncertainty across the board, which may make the government more hesitant for the moment. Provided that financial market stabilized in the next few weeks, we expect the RMB to be allowed to appreciate faster against the USD within the next couple of months, most likely in the form of a gradual move accompanied by an increase in the daily trading band, and trade at 6.6 against the USD by end of this year.” (June 4, 2010)

“We expect export growth to slow from Q3 onwards, but continue to outpace imports in volume for the rest of the year, leading to a sizable trade surplus for 2010. We currently hold a non-consensus view that the RMB will de-link with the USD in the coming weeks, initially showing a modest appreciation against the USD (about 3%).” (June 10, 2010)Tao Wang, UBS

“Today’s confirmation that exports surged in China last month makes an early move on restarting currency reform more likely and should also dampen fears that the economy is heading into an abrupt slowdown.” (June 7, 2010)

“Leaked Chinese data point to a surge in exports last month that will assuage some concerns that the economy is slowing and draw attention back to China’s stalled currency policy reforms.” (June 9, 2010)Mark Williams, Capital Economics

“Our assessment is de-pegging from the USD and moving to a more flexible exchange rate regime is the right thing for the Chinese government to do, not the least because of the foreseeable trade protectionist pressures …. The move could take place anytime, although we still remain hopeful on the window of opportunity left around the G 20 meeting on June 20. Meanwhile, we continue to believe the central bank will hike the policy interest rate if domestic CPI inflation rises beyond the government’s tolerance level of 3% yoy and continues to accelerate. However, if the financial conditions tighten more than we expected, which translates into weaker growth momentum quickly in the coming months, the risks to both our forecasts of a 5% appreciation in the next 12 months and 3 rate hikes before the yearend will probably be on the downside.” (June 7, 2010)Helen Qiao, Goldman Sachs

“Our contacts in Beijing suggest a Chinese currency move is probably in the cards within the next 4-6 weeks.” (June 3, 2010)Michael Kurtz, Macquarie

“What we can take away from this is the firm conclusion that the government is no more inclined to revalue the yuan than it was before.” (June 1, 2010)

“As far as we can see, China has no plans to revalue its yuan anytime soon – such a move is not in its own interests.” (June 7, 2010)Carl B. Weinberg, High Frequency Economics

“While we do not rule out the possibility that China’s leaders may show willingness of letting the RMB move in a wider band, from our view the chance of seeing RMB to actually appreciate in the first half is almost gone…….If China wants to restore its exchange rate to the stable level in 2005-2008, the RMB should be devalued significantly. From this point of view, it is not difficult to understand why the US is willing to put aside the RMB issue. Overall, it seems that the US and China reached consensus on RMB exchange rate reform. We believe that the timing of RMB appreciation is likely to be delayed. (May 27, 2010)Research Team, CEBM China Research

“We postpone our call for Chinese yuan (CNY) “de-pegging‟. We now expect China to de-peg the CNY from the US dollar (USD) in Q3. Previously, we had forecast that China would move in May. In our view, China is unlikely to de-peg the CNY anytime soon due to the following factors: (1) financial-market volatility and deteriorating sentiment towards the global recovery, and (2) the recent sharp appreciation of the CNY real effective exchange (REER).” (May 24, 2010)Stephen Green, Standard Chartered Bank

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